"We need to stop being surprised by the continued weakness of job creation and start being prepared for it. We need to confront a changed global system and the place of the United States in it, as well as the challenges of future growth for what is on balance an extremely affluent society compared with the rest of the world. The cycles of the 20th century are not and will not be the cycles of the 21st. This time, it's different."
-- Zachary Karabell, Daily Beast ("Jobs Aren't Coming Back")
On Friday, I wrote that there was no way to put lipstick on the (employment) pig.
The mistake many have made and are continuing to make is that they view the jobs weakness of 2009-2011 as cyclical. It is not -- rather, it is a structural phenomenon. Employment will not resume (relative to bullish expectations and relative to past cycles) as the overall economy recovers.
The economy in the 21st century will not resemble the economy of the 20th century.
It's different this time.
Public policy of throwing money at the jobs problem (quantitative wheezing) is misplaced. Nor will lowering tax rates for corporations and the wealthy help -- both groups have more than enough liquidity. Corporations, in particular, have never had more liquidity and more solid balance sheets, yet they are still not hiring.
So, from my perch, trickle-down economic theory is dumb theory -- it's yesterday's theory.
Indeed (with the benefit of hindsight), the policy of quantitative wheezing had adverse consequences in raising the costs of the necessities of life and by penalizing the savings class, placing more pressure on the middle class. (Screwflation of the middle class remains an important theme to the last decade and to the next 10 years.)
The wrong tools are being used to deal with elevated unemployment that is being influenced by new factors that include globalization, austerity, the shedding of municipal jobs (associated with local, state and federal fiscal imbalances), technological innovation and the use of part-time employees as a permanent part of the workplace, reflecting mounting health care costs and the costs of regulatory burdens.
Structural unemployment will be a consistent drag on domestic economic growth -- and, in the fullness of time, corporations will be victimized by lower demand for their products -- until authorities recognize the source of the secular problem and deal with it in a more focused and aggressive manner.
Investors will soon recognize that correcting our structural issues requires time and patience. When they finally do, share prices and valuations will be lower than they are today.
The notion of a self-sustaining and smooth recovery in the U.S. is in jeopardy and is now further complicated by the sovereign debt contagion in the eurozone, which, too, is being addressed by kicking the can in a temporary but not meaningful way.
In the final analysis, the budget impasse in the U.S. will be "resolved" but only with some more can kicking.
As to the U.S. stock market viewed as a leading indicator of growth, that is bogus, too. In 2002, 2007 and in the first half of 2010, the direction of the U.S. stock market gave the wrong signals on the direction of economic growth. Stated simply, the recent two-week rally in stocks is, too, giving the wrong signal of smooth and self-sustaining growth.
Over the weekend, I received numerous emails from some of my more thoughtful friends in the investment business. With few exceptions, they have acquiesced to the strong price momentum of stocks. Some saw the rally as a "good overbought," and many remarked that skepticism remained high and that, until there was a more pronounced shift to optimism, stocks would continue to rise. Others expressed the view that stocks have discounted the problems and, with inflation "low" and interest rates near zero, stocks were cheap and the best house in a bad neighborhood. Some were even more honest and simply said that their investors paid them to be long not to be skeptical, especially when stocks were rising. (In other words, don't fight the tape.)
It should be noted, however, that sentiment has shifted to a more optimistic mood with advancing share prices:
The AAII individual investor survey is at five-month high (42% bullish/26% bearish).
The CBOE 10-day put/call ratio has fallen from 1.15 to 0.92.
ISI's hedge fund study indicates a swift and sudden rise in net long positions in the past seven days (from 49.4% to 52.6%).
My overall view?
As I wrote on Friday, I would now sell stocks as the risk/reward is currently unfavorable.
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